Fixed and variable costs

The fixed and variable costs are respectively the expenses that do not vary and that are necessary for the basic operation of the company, and the expenses that are based on the volume of activity.

Fixed and variable costs

That is, the fixed costs on the one hand must be assumed without significant changes in the amount. And, on the other hand, variable costs are proportional to the quantity of product manufactured.

Total, fixed and variable costs

In the first place, if we obtain the amount of both costs, we will automatically have the value of the total costs that occur in the company:

Fixed And Variable Costs

Second, we know that revenues must be higher than the aforementioned total costs in order for the company to begin to profit. This situation can be calculated with the so-called profitability threshold or deadlock, which consists of calculating the number of units that must be sold to cover total costs:

Formula 1

But what are product prices and unit variable costs? Very simple, the price of the unit product is nothing other than the price that we put on the product that we put when selling it. On the other hand, the unit variable cost is calculated as follows:

Formula 2

In this way, taking the total amount of variable costs and dividing it by the total units of manufactured product, the result is the variable cost that is charged individually to each unit of product. With this we know that the price that you will put on the product in theory should never be less than the unit variable cost.

Examples of fixed costs and variable costs

Below we are going to present some examples of both types of costs to be able to differentiate them correctly and have a general idea:

Fixed costs:

  • Supplies
  • Rent or other leases.
  • Insurance
  • Administration expenses.
  • Taxes.
  • Labor (in the event that no one or almost no one can be dispensed with)

Variable costs:

  • Raw material.
  • Commissions of commercial agents.
  • Shipping costs.
  • Labor (in the event that part of the staff can be dispensed with).

Thus, we see how there are even costs that, depending on their nature, could be classified within one type of cost or another.